When Liquidity Matters in ETFs

A reader wrote in to ask me about ETF liquidity, saying he was interested in buying iShares S&P Global Telecommunications Sector Index Fund(IXP Quote) because he believed it looked good technically. He was focused on a pop higher, by about 0.66%, at the open Wednesday on what he saw as a 1,000-share trade.

The easiest way for me to start assessing his take on the fund was to look at a similar product for comparison. The WisdomTree International Communications Sector Fund(DGG Quote) opened higher by about 0.5%-1%, so my take was that the move in IXP was nothing out of the ordinary.

Liquidity does appear to be an issue with a lot of ETFs, but the number of shares actually traded is far less important than the specialist's willingness to execute orders. Think of it this way: If an ETF with a wide bid/ask spread has traded only 300 shares today but the specialist will execute a 10,000-share order at the ask price or a penny below, the 300 shares traded prior mean nothing. ...